Zero funding rate? The new HyperEVM contract design everyone overseas is talking about
- Core Thesis: Crypto trader Jez has launched a new perpetual contract protocol called PaperTrade on HyperEVM, featuring zero fees, zero slippage, and zero funding rates. However, it is essentially a mechanism where users bet against an LP pool, converting trading losses into platform shares via the PAPER token.
- Key Components:
- PaperTrade reads Hyperliquid quotes but does not match orders; trades are settled directly between users and a public LP pool, similar to the historical "bucket shop" gambling model.
- The LP pool does not accept external deposits and relies solely on losing users' margin funds. Profitable users are placed in an on-chain creditor queue, awaiting subsequent losses to fill their payouts.
- The PAPER token is minted on a curve based on user losses. For every $1 lost while the LP balance is below $2 million, 100 PAPER tokens are minted; the minting rate decays once the LP balance exceeds that threshold.
- PAPER stakers receive protocol fee income and any excess LP pool funds above $5 million, creating a closed loop: "Losers get shares, winners take losers' money."
- Strategy suggestion: Mint PAPER by incurring losses when the LP pool's TVL is low, and stake PAPER to earn dividends when the TVL is high.
Cryptocurrency trader Jez today announced PaperTrade, a new protocol built on HyperEVM, sparking heated discussions within the English crypto community.
A long-time advocate of perpetual contracts, Jez took a substantial early position in Hyperliquid, with his account address ranking high on the airdrop leaderboards for Lighter and Variational. This time, he is entering the fray himself, building a Perp DEX with zero fees, no slippage, and no funding rate.
Old-School Bucket Shop Exiled On-Chain
PaperTrade's mechanism has a notorious historical predecessor. In early 1900s American small towns, bucket shops operated under the guise of brokerage firms. They would chalk up real-time NYSE quotes on a board behind the counter, but customer orders never left the owner's drawer. Essentially, it was a bet between the customer and the shop owner. This business was outlawed in New York State in 1909 and had largely disappeared by the 1920s.
When a user opens or closes a position on PaperTrade, the protocol directly reads the order book price from Hyperliquid and settles the difference directly with a public LP pool. Throughout this entire process, no order enters Hyperliquid's matching engine, and no actual perpetual contract changes hands. The transaction is always between the user and the LP pool, with no third-party counterparty.
Perpetual Contract + P2P + DeFi Ponzi
PaperTrade simultaneously borrows models from DeFi yield farming and P2P lending.
User losses on PaperTrade are deposited intact into the protocol's LP pool, while user profits are subject to a protocol fee. The smaller the price fluctuation, the greater the fee collected. In other words, the more users earn, the less the protocol takes.
Unlike HLP, PaperTrade's LP pool has no team pre-deposit, no VC funding, and does not accept any form of external deposit. Its sole source of funds is the margin from user losses.
The problem arises: if the LP pool only has $100, but a user profits $5,000, how can the protocol pay out?
PaperTrade brings the concept of a debt queue from traditional P2P lending to the chain.
This $5,000 profit enters an ordered on-chain queue, awaiting subsequent losing trades to fill the gap. The queue pays out sequentially from the front. The user's principal is always returned immediately; only the profit portion is queued.
Theoretically, the LP can become "insolvent" periodically, but every winner will eventually be paid, unless the losses from losers are insufficient to cover the profits owed to winners.
If it ended here, this project would be destined for failure. If the LP pool runs out of money, winners might have to wait indefinitely in line to receive their profits, naturally losing their incentive to trade. Traders would leave, and without even losers, the platform's debt to winners would become bad debt.
The essence of PaperTrade is its token, PAPER.
For every dollar a user loses, the protocol mints a specific amount of PAPER according to a curve.
When the LP balance is below $2 million, the minting ratio is fixed at 100 PAPER per $1 lost. Once the LP exceeds $2 million, the rate begins to decay; the higher the LP balance, the fewer PAPER are minted per dollar lost.
X-axis: PAPER received per unit loss; Y-axis: LP balance (unit: 1M)
Staking PAPER entitles holders to two types of dividends: first, the protocol's fee revenue; second, once the LP balance exceeds $5 million, all excess funds are allocated entirely to stakers.
In other words, the LP pool size is engineered with a $5 million cap. Above this threshold, all user losses are redirected to PAPER holders. This creates a closed loop: "Losers gain platform equity, winners take losers' money, and the protocol taxes winners to subsidize losers."
Therefore, a plausible participation strategy can be summarized as: bet and lose money when the LP pool's TVL is low to mint PAPER, and stake PAPER when the LP pool's TVL is high to collect dividends.
Stress Test for HyperEVM
In the author's opinion, the biggest uncertainty for PaperTrade lies within the HyperEVM it is deployed on.
PaperTrade essentially uses Hyperliquid's price feed as a free, native oracle, with all other logic residing within HyperEVM smart contracts.
This means any high-performance chain with similar capabilities, willing to integrate an external price oracle, could replicate PaperTrade's entire mechanism exactly. A replicator could even offer things HyperEVM currently lacks: lower gas fees, higher TPS, more generous early subsidies, and more aggressive token incentives.
During the Q1 2024 meme season on HyperEVM, the network experienced a period of slow transaction speeds and high gas fees. The launch of PaperTrade serves as another significant test for HyperEVM.
